As we enter yet another year of the foreclosure crisis, more and more people are turning to creative approaches to a global cure for the breakdown in the system. Most recently, a group of investors have suggested that eminent domain be used in the states hardest hit by the mortgage foreclosure crisis (read as Florida, California and Nevada) to help alleviate the foreclosure crisis. Here’s a good overview from Felix Salmon at Reuters and another from NBC News.

Like many cure-all ideas, the concept has some initial appeal: government takes over distressed properties while letting the banks holding the mortgages off of the hook for potential losses and at the same time allowing families to remain in their homes under leases to the government.

Unfortunately, the devil is in the details. First, the states-rights arguments would all but preclude the federal government from being able to administer such a program. Imagine the court cases which would arise from the Federal Department of Housing and Urban Development condemning lands piecemeal within various counties, cities and towns. Even with some sort of specific program created by the Congress, the impacts and issues would be significant. Would the federal government be paying the property taxes on these properties? Could the cities and counties file liens for unmowed lawns and green swimming pools?

This leaves state and local governments as the only viable alternative. In Florida, in order to use condemnation, a government must be able to show a valid public purpose and a relationship between that purpose and the proposed action. Here in Florida, the legislature passed Florida Statutes 73.014 (“Taking property to eliminate nuisance, slum, or blight conditions prohibited”) in 2006 in the wake of the Kelo v. New London fallout (see our article below for a quick recap of this now infamous court case). That statute mandates:

(1) Notwithstanding any other provision of law . . . any [ ] entity to which the power of eminent domain is delegated may not exercise the power of eminent domain to take private property for the purpose of abating or eliminating a public nuisance . . . eliminating a public nuisance is not a valid public purpose or use for which private property may be taken by eminent domain and does not satisfy the public purpose requirement of s. 6(a), Art. X of the State Constitution. . . .

(2) Notwithstanding any other provision of law, . . . any [ ] entity to which the power of eminent domain is delegated may not exercise the power of eminent domain to take private property for the purpose of preventing or eliminating slum or blight conditions . . . taking private property for the purpose of preventing or eliminating slum or blight conditions is not a valid public purpose or use for which private property may be taken by eminent domain and does not satisfy the public purpose requirement of s. 6(a), Art. X of the State Constitution

So what public purpose would be put forth other than elimination of blight? There may be arguments related to the stabilization of real estate markets or helping homeowners stay in their houses, but that all rings of euphemisms for blight prevention.

Second, what would such a program look like? From the proposals put forward so far, it would entail a condemning authority (some have proposed either a governmental entity or a privately capitalized pseudo-governmental entity) condemning the properties from the owners and paying the banks the ‘fair market value’ of the property is while allowing the owners to remain in the homes.

The Florida Constitution entitles a property owner to have his or her attorneys’ fees, expert fees and costs paid by the condemning authority as part of the full compensation to which they are entitled. Beyond that, the owner is entitled to full compensation, which sometimes means fair market value, but can (and often does) include additional amounts appropriate “to make the owner whole.”

What this means is that a program such as the one proposed would cost multiples of what these investors or the local governments envision – and appropriately so. If the government is involuntarily seizing citizens homes and assets, isn’t it appropriate that it be done in a careful manner with multiple checks to ensure everyone is treated fairly?

The second proposed option which is being discussed is condemnation of the mortgages themselves. This would be unprecedented in Florida, and posibly the country. Florida Courts have held that mortgage holders do not have property rights in the property they encumber (unlike easement holders) and are therefore not entitled to any eminent domain proceeds during a condemnation, absent provisions in the mortgage. Where there are provisions in a mortgage, the mortgage holder may be entitled to receive the property owners’ just compensation to be applied against the outstanding balance of the loan. However, these are contractual rights, not property rights. Can they be condemned? Who knows. And how does one go about finding the fair market value of a mortgage on a given date?

Here’s a quick example of the problem. A property owner has a piece of property worth $250,000 with a $400,000 mortgage on it. What is the value of the mortgage? The condemning authority’s position would likely be that the mortgage value is capped at $250,000. The mortgage holder would say no less than $400,000.

This would be confiscatory in some, if not all cases. Mortgage holders have a right to seek and obtain a deficiency judgment against a borrower. This means that on top of the value of the mortgage, the courts would have to conduct evidentiary trials (in front of 12 jurors as mandated by the Florida Constitution) in which evidence of the probability of payment, the assets of the debtor and the collectability of a deficiency judgment would be necessary to show the value of the mortgage. This would make each of these trials into a soap opera of what other assets the debtor has and what is or is not collectible.

While the discourse is very healthy in light of the ongoing foreclosure issues nationwide, eminent domain is not the silver bullet. By its nature, Eminent Domain is a non-voluntary process, and therefore requires extensive judicial checks to make sure the power is not abused.

Feel free to contact us at the email address below to discuss your eminent domain concerns.

Condemning Authorities

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